Which of the following financial ratios would indicate a supplier’s potential exposure risk to a steep rise in inflation?

Which of the following financial ratios would indicate a supplier’s potential exposure risk to a steep rise in inflation?
A . acid test
B . current ratio
C . gross profit margin
D . gearing ratio

View Answer

Answer: D

Explanation:

The correct answer is ‘gearing ratio’.

Gearing measures how much of a company’s funding is based on long-term debt or loans- this would be affected by a steep rise in inflation. If a company has a mortgage on their offices or facto-ry and they need to remortgage and inflation has gone up a lot- they’ll be paying a lot more on their mortgage. This will severely effect the gearing ratio as they’ll have more outgoings than incoming. Gross profit margin COULD be affected by inflation, for example if you’ve got hyper-inflation and the country goes into recession and people stop buying your product. However, this answer isn’t al-ways right and depends on many factors- the industry, the product, the company etc, so for the purpose of CIPS should be discounted. There are many industries which are immune to inflation.